Cement: MAPLE LEAF CEMENT FACTORY LIMITED - Analysis of Financial Statements Financial Year 2003 - 2003 Q 2009
Maple Leaf Cement Factory Limited (MLCFL) is part of the KMLG (Kohinoor Maple Leaf Group). This company came into being on 1st July 1992 when three cement firms namely, MLCF (Maple Leaf Company Limited), WCIL (White Cement Industries Limited) and PCCL (Pak Cement Company Limited) were privatized and sold to the Kohinoor Group. It is listed on all the three stock exchanges of the country.
MLCFL is Pakistan's third largest cement manufacturer with a capacity to produce 3.69mtpa cement. The company's capacity forms 10.5% of the total cement capacity of the sector. MLCFL produces and sells both grey and white cement. The company has three production lines for grey and three production lines for white cement manufacturing. Its plants are located at Daudkhel District Mianwali. The production capacity of grey cement rose to 2.84 million tons and the capacity of white cement increased to 180,000 tons during FY08. Like other companies in the cement sector, MCLF also undertook ambitious expansion and up gradation plans.
CEMENT SECTOR PERFORMANCE
The cement sector had shown an impressive growth of 24.3% in the cement dispatches during FY08, owing to a strong demand in the local market and supply deficits in the regional markets. The major boost had come from the export sales (a growth of 142%) while local cement dispatches had grown nominally by 6.5%. However the sector could not maintain this strong performance during FY09. During 1Q'09, the total cement dispatches of the sector increased only by 0.7% (to 7.33m tons as compared to 7.28m tons in 1Q08). The local dispatches fell by 15.4% from 5.72m tons in 1Q08 to 4.83m tons in 1Q09.
Unfavourable economic conditions in the country caused the construction activity to slow down and resulted in lower local demand for cement. Exports however, increased by almost 60% to 2.50m tons in 1Q09 from 1.57m tons in 1Q08 due to demand in the regional countries. However, the export growth was lower as compared to 140% growth experienced during the previous fiscal year as the global economic turmoil started to affect Pakistan's cement exports. During HY09 local cement dispatches declined by 15% to 9.256 million tons due to slow economic activity and cut down on PSDP expenditure by the government. However, exports of clinker and cement showed a growth of 54%. Thus the growth in exports boosted the overall sales of the sector during HY09.
RECENT RESULTS
During the period July-Mar FY09, MLCFL was able to produce 2,186,977 metric tons of grey cement and 60,990 metric tons of white cement as compared to the production in the corresponding period of 1,450,434 metric tons of grey cement and 51,920 metric tons of white cement. The production of white cement increased by around 17.5% during 3Q'09. The production of grey cement grew by 51% during 3Q'09 as compared to 3Q'08. The production performance of MLCFL was much better than the overall production trend in the cement sector. Due to low demand, cement production in the sector increased only by 4.7% during Jul-Mar FY09, the lowest growth in the last six years.
Overall, the sector's cement dispatches were 0.4% lower during Jul-Mar FY09 as compared to the cement dispatches in Jul-Mar FY08. Exports constituted 36% of total cement dispatches. In case of MLCFL, however, cement dispatches increased during the period Jul- Mar FY09. As the production of grey and white cement increased, the company's sales volume of both types of cement also increased. The sales volume of grey and white cement were 38% and 18% higher during 3Q'09 as compared to corresponding period last year.
The sales revenue earned by the company during Jul-Mar FY09 was 146% higher (Rs 11,084 million during Jul-Mar FY09 as compared to Rs 4,507 million during the corresponding period of FY'08). This increase in sales revenue translated into higher gross profit for the company. MLCFL generated a gross profit of Rs 3,545 million during Jul-Mar FY09 as compared to Rs 491 million during same period of last fiscal year.
RECENT PROFITABILITY After experiencing declining profitability during FY08, the cement sector came back strongly to post a growth of 833% in profits during the first nine months of fiscal year 2009. The total profits of listed cement companies increased from Rs 395 million in nine months of FY08 to Rs 3.7 billion in the nine months of FY09.
The profits increased despite a decline of 0.4% in the cement dispatches during Jul-Mar FY09. Thus, the growth was mainly due to higher net retention prices which increased by 64% to Rs 230 per bag. It is believed that the profits of cement companies increased due to an arrangement among them to keep prices high in the local market. Also, the depreciation of rupee against dollar made Pakistani cement exports cheaper and resulted in better export-based revenues for the companies. The net sales of the cement sector in the period Jul-Mar FY09 was 74% higher than the net sales generated during the corresponding period of FY08.
Contrary to the overall performance of the cement sector, MLCFL posted a loss of Rs 685 million for the period Jul-Mar FY09 as against a loss of Rs 373 million registered in the corresponding period of last year. The reason for this is higher costs which limited the impact of higher sales revenue on the profits of the company. Cost of sales increased by around 88% during the first three quarters of FY09. One of the reasons of higher cost of sales could be higher production during the period. Also, inflationary pressure and higher raw material costs were the main drivers of cost of sales for MLCFL.
The operating expenses also increased as administration expenses rose by 56%. Distribution costs depicted a substantial 6 times increase (due to higher freight charges). Finance costs also increased by 197%, and this is due to the prevailing higher interest rates in the economy. The company had to pay higher mark-up on long term loans, finances, redeemable capital and short-term finances. Higher financial charges and depreciation were the two primary factors that affected the profitability of the company. The finance costs increased mainly due to fair value measurement of cross currency swaps and foreign exchange rates. During HY09, MLCFL had to absorb a loss of Rs 593.577 million on account of cross currency swaps.
SALES - FY08
MLCFL performed well, both, in the local and export markets. It gross domestic sales increased by 51% while its exports increased manifold, from Rs 101 million in FY07 to Rs 2,357 million in FY08. It exported to Afghanistan, India and the Middle East. This also raised the share of exports in MLCFL's total sales. In FY07, exports contributed only 2% while local sales were 98% of total cement sales. The share of local sales however, went down to 78% as exports contributed 22% to total sales of the company in FY08. This was in line with the industry trend as the export market share in total cement sales of the sector increased to 24.5% during the first 11mths'08 from 12.7% in the same period last fiscal year.
PROFITABILITY
Despite the strong growth in the total cement dispatches of the sector, the profitability has declined substantially. During the first three quarters of FY08 the profitability of the sector fell by 73.6%. Similar is the case with MLCFL as its total cement dispatches (grey cement and white cement) increased 86% in FY08. In fact the company's growth in sales outperformed the industry sales growth. Its gross sales almost doubled as it increased tremendously during FY08, from Rs 5.5 billion to Rs 10.5 billion. But despite such stellar sales performance, MLCFL like many other companies of the sector, experienced a loss after taxation. MLCFL posted a loss of Rs 676 million in FY08.
Before FY07, the company was registering strong growth in its profits. In FY07 the profits of MLCFL declined drastically because of an excess supply situation in the industry and falling net retention prices. Many cement companies in the sector carried out huge expansion plans and debottlenecking in an attempt to increase their capacities and production. As the supply increased the cement manufacturers resorted to price wars and this led to a fall in prices. The decline in the net retention prices hampered the earnings of MLCFL and the entire cement industry.
This situation continued in FY08 and the average cement prices decreased further during the Jul-Mar FY08 to Rs 128.3 per bag from Rs 133.6 per bag same period in FY07. As the cement companies were hit badly by this price war, they ended it and towards the end of FY08 the prices started to improve. Rising costs also affected the profitability of the cement sector. Imposition of higher Federal and Provincial taxes increased the woes of the cement sector. MLCFL had to pay higher excise duty and sales tax. Also cost of sales for the company almost doubled from Rs 3 billion in FY07 to Rs 6.5 billion in FY08.
Crude oil prices shot up during FY08 and had its impact on prices of coal and natural gas. Fuel costs caused the export expenses to be higher. Also higher electricity tariffs added to the rising cost of production of the company. Fuel and power costs together form the largest portion of MLCFL's production costs in FY08 and had the greatest impact on the profitability of the company. As the global demand for coal increased and China limited its supply of coal, the coal prices increased tremendously. MLCFL relies heavily on coal for energy because furnace oil is a much expensive alternative for calcining process. Prices of natural gas also increased during the year.
Depreciation expense almost doubled during FY08 because of the addition of the 6,700tpd production line to the operating assets of the company. Financial charges, which formed 20% of production costs, increased by 96% because of the increased interest rates in the economy. MLCFL obtained a syndicated term finance facility during FY07 to prepay the outstanding long-term debts of the company. In FY08, additional interest was paid on loan from related parties, redeemable capital, and liabilities against assets subject to finance lease. MLCFL was also affected by loss from exchange fluctuations.
A tremendous increase in the costs has deeply impacted the profitability of MLCFL and this is reflected in the profitability ratios. Gross profit margin and net profit margin declined substantially in FY07. Gross profit margin improved in FY08, helped by an increase in the net sales of the company. Gross profit improved by 327% in FY08 as compared to FY07. However, the effect of rising costs is evident from the fall in the net profit margin in FY07. The decline in the return to assets ratio of MLCFL has resulted from its low earnings during FY07 and FY08 and high interest costs occurring from higher debt.
LIQUIDITY
The firm's liquidity had improved in FY07 because the current assets increased more in proportion to the increase in current liabilities. However, in FY08 the current liabilities increased by 96% while current assets rose only by 48%. Some of its liabilities (syndicated term finances and finance lease liabilities) are close to maturity and that shows an increase in the figure of current liabilities. The dividend liabilities on preference shares have accumulated and short term finances increased in FY08. MLCFL has short term finance facilities from various commercial banks and this amounted to Rs 3.750 billion in FY08.
ASSET MANAGEMENT
The inventory turnover rate of MLCFL increased showing that it took lesser days for the company to sell its stock trade. However, the company's average collection period of accounts receivable increased and so did is operating cycle. One reason could be the increase of 282% in the company's trade debts. As the accounts receivable grew in FY08, the collection period also increased ie it took longer to recover receivables. The total asset turnover ratio of MLCFL, on the other hand improved in FY08, indicating that the company was able to generate sufficient sales volume given it total assets investments. The net sales of the company increased overall by 110% while total assets of the company increased by 11.6%.
DEBT MANAGEMENT
Leveraged firm's profitability declines when economy takes a downturn and in tight monetary situations. As interest rates were steadily increased in FY08 the cost of borrowing for the firm has increased. The graph shows an increased proportion of debt relative to assets and equity. As the company suffered a pre-tax loss in two successive years the TIE ratio has declined. The firm can not pay for its expenses through earnings and will have to raise extra capital or debt to pay its obligations.
However, the company re-profiled its debts. This was to provide the company with substantial savings in its financial cost in future along with easing out its immediate debt burden. MLCF was paying a high interest charge of 11.3%-12.9% in FY07, which came down to 11.5%-11.9% after the debt restructuring. But higher interest rates in the economy increased the overall financial costs of the company. It carried on its policy of restructuring its finance structure in FY08. MLCFL replaced conventional debts with Shariah Compliant Financing and this repaid premature long term loans and finances through Redeemable Capital and Syndicated Term Finances. The share price of the company has fallen in response to the fall in profitability of the MLCFL and it depicts lower investor expectations about future earnings.
FUTURE OUTLOOK
In the budget 2009-10 Federal Excise Duty on cement has been reduced by Rs 200 per metric ton. This was an attempt to provide some relief to the construction industry in Pakistan. As a result of this budget announcement, cement prices in the domestic market have been slashed by Rs 10 per 50-kg sack. The high quality cement is being sold at Rs 350 per bag, while the average quality product is being tagged at Rs 330 per bag. The cut in local cement prices are expected to increase the local demand for cement. The budget 2009-10 has also allocated Rs 626bn under PSDP and Rs 15bn to cement the inner lining walls of water canals. The government has also increased the housing loan tax shield permissibility from Rs 500,000 to Rs 700,000. These budgetary measures are expected to support the falling cement demand in the country.
GDP growth estimates have been kept at a modest level of 3.3% as compared to the current year's targeted level of 5.5% and actual level of approximately 2% in this year's budget. Cement consumption is correlated with GDP per capita. Low expected GDP per capita may mean another year of depressed sales for the cement sector. However, exports have so far shown a strong growth and supported the total cement dispatches. Cement manufacturers have been focusing on the international markets to achieve growth in sales. Pakistan has been exporting to Afghanistan. Regional shortage of cement had presented a favorable opportunity for our cement manufacturers.
Cement demand in Afghanistan is expected to be 1.5m-2.0m tons per annum for the next five years. Cement manufacturers have growing opportunities in Middle East and African countries. New export markets like Russia and European countries have been identified. Growth in export sales may boost the margins of the industry and reduce the negative impact of rising costs on its profitability.
However, the effects of global recession have started to impact international demand for cement. Indian market, which was a window of opportunity for Pakistani cement manufacturers, has been closed as India banned import of cement from Pakistan due to escalating tensions between the two countries. Expenses are expected to increase for cement manufacturers. This will negatively impact the gross margins of the cement sector. During the past, our cement manufacturers shifted production from oil to coal or gas. Pakistan has huge reserves of coal but manufacturers need to import coal due to high sulphur content.
The coal prices in the international market have fallen from their peak level of US $210 per ton. But the depreciation of Pakistani rupee will neutralize the impact of decreasing international coal prices. Also the government has raised the power tariff by nearly 50% with variable rates for peak and off peak hours. The gas prices have also risen. Hike in fuel charges and transportation costs, as well as power and gas load shedding may adversely impact export volumes in the future. This will increase the cement manufacturers' cost of production and impact their profitability in FY09. As the cement sector has undergone huge capacity expansion during the recent years and with more production capacity coming online within the region, the market for cement will become highly competitive.
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Name of Company Maple Leaf Cement Factory Limited
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Ticker MLCF
Assets (March 2009) Rs 5,202,843,000
Share Capital Rs 4,264,108,000
Sales Revenue (Jul 08-March 09) Rs 11,083,500,000
Profit/ Loss After Taxation (March 2009) Rs (685,128,000)
Market Share Price (26th June 2009) Rs 4.30
Market Capitalization (26th June 2009) Rs 1,600,732,620
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MAPLE LEAF-FINANCIALS
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Rs '000'
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Income Statement FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Net Sales 2,404,807 3,375,799 4,290,734 5,709,792 3,711,081 7,815,829
Cost of Goods Sold 2,043,257 2,227,571 2,962,802 3,561,212 3,401,188 6,491,999
Gross Profit 361,550 1,148,228 1,327,932 2,148,580 309,893 1,323,830
General & Administrative Expenses 48,648 46,804 40,287 60,474 67,291 121,326
Selling & Distribution Expenses 10,658 12,973 20,961 69,021 834,849
Operating Profit (EBIT) 334,947 1,101,899 1,292,769 1,975,792 198,434 448,563
Financial Charges 427,863 310,839 205,677 340,978 338,453 1,812,807
Net Income Before Taxes -92,916 751,507 1,087,092 1,634,814 (140,019) (1,364,244)
Net Income After Taxes 150,103 487,472 727,450 1,059,240 42,047 (676,135)
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Balance Sheet FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Store, Spares & Loose Materials 565,361 941,544 1,100,967 1,847,926 2014580 3,325,744
Stock-in-trade 98,223 100,145 183,217 200,946 369,709 433,952
Trade Debts 93,227 87,104 92,597 163,459 194,587 743,366
Cash & Bank Balances 130,945 223,271 369,802 100,938 123,359 118,894
Other Current Assets 663,578 1,046,577 193,476 2,383,268 1,349,722 1372940
Total Current Assets 1,551,334 1,499,266 1,940,059 2,664,462 4,051,957 5,994,896
Total Non-Current Assets 5,770,094 5,588,342 8,488,914 16,480,436 19,385,017 20,156,665
Total Assets 7,321,428 7,087,608 10,428,973 19,144,898 23,436,974 26,151,561
Total Current Liabilities 1,156,620 1,188,435 1,595,499 2,649,519 3,756,487 7,382,464
Total Long Term Debt 2,186,687 2,199,356 7,881,174 8,844,697 241,539
Total Non Current Liabilities 2,954,736 2,201,629 2,543,012 8,939,675 10,687,450 10,408,208
Total Liabilities 4,111,356 3,390,064 4,138,511 11,589,194 14,443,937 17,790,672
Total Equity 3,210,072 3,697,544 6,290,462 7,555,704 8,993,037 8,360,889
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PROFITABILITY FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Gross profit margin 15.03% 34.01% 30.95% 37.63% 8.35% 16.94%
Profit margin 6.24% 14.44% 16.95% 18.55% 1.13% -8.65%
Return on Asset 2.05% 6.88% 6.98% 5.53% 0.18% -2.59%
Return on Equity 4.68% 13.18% 11.56% 14.02% 0.47% -8.09%
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LIQUIDITY RATIO FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Current Ratio 1.34 1.26 1.22 1.01 1.08 0.81
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ASSET MANAGEMENT FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Inventory Turnover Rate 20.80 22.24 16.17 17.72 9.20 14.96
Days to sell inventory (Days) 17.31 16.18 22.26 20.31 39.13 24.06
Day Sales Outstanding (Days) 13.96 9.29 7.77 10.31 18.88 34.24
Operating cycle (Days) 31.26 25.47 30.03 30.62 58.01 58.30
Total Asset turnover 0.33 0.48 0.41 0.30 0.16 0.30
Sales/Equity 0.75 0.91 0.68 0.76 0.41 0.93
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DEBT MANAGEMENT FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Debt to Asset 0.56 0.48 0.40 0.61 0.62 0.68
Debt/Equity (Times) 1.28 0.92 0.66 1.53 1.61 2.13
Times Interest Earned (Times) 0.78 3.54 6.29 5.79 0.59 0.25
Long Term Debt to Equity 0.00 0.59 0.35 1.04 0.98 0.03
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PER SHARE FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Earning per share 0.83 2.70 3.26 3.38 -0.03 -1.96
Price earning ratio 0.05 0.07 0.15 0.13 (333.33) (5.10)
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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